Part Ⅳ

Trade Policy
Preview

 Chapter 9
The Instruments of Trade Policy
 Chapter 10
The Impact of Trade Policies
Chapter 9
The Instruments of Trade Policy
Tariffs
 A specific tariff is levied as a fixed charge
for each unit of imported goods.
 An ad valorem tariff is levied as a fraction of
the value of imported goods.
The Instruments of Trade Policy

Export taxes and subsidies

Nontariff barriers to free trade:

 Import quotas

 “voluntary” export restraints

 Government procurement provision

 Domestic content provision

 European border taxes

 Administrative classification
The Instruments of Trade Policy

Nontariff barriers to free trade:

 Restrictions on services trade

 Trade-related investment measures

 Additional restrictions

 Additional domestic policies that affect trade

Chapter 10
The Impact of Trade Policies
The Effects of a Tariff
 A tariff acts as an added cost of transportation,
making shippers unwilling to ship goods unless the
price difference between the domestic and foreign
markets exceeds the tariff.
 If shippers are unwilling to ship wheat, there is
excess demand for wheat in the domestic market
and excess supply in the foreign market.
 The price of wheat will tend to rise in the domestic market.
 The price of wheat will tend to fall in the foreign market.
The Impact of Trade Policies
 Thus, a tariff will make the price of a good
rise in the domestic market and will make the
price of a good fall in the foreign market, until
the price difference equals the tariff.
 PT – P*T = t
 P T = P *T + t
 The price of the good in foreign (world) markets
should fall if there is a significant drop in the
quantity demanded of the good caused by the
domestic tariff.
The Impact of Trade Policies
The Impact of Trade Policies

The Effects of a Tariff in a Small Country

 When a country is “small”, it has no effect on
the foreign (world) price of a good, because
its demand for the good is an insignificant
part of world demand.
 Therefore, the foreign price will not fall, but will
remain at Pw
 The price in the domestic market, however, will
rise to PT = Pw + t
The Impact of Trade Policies

The Effects of a Tariff in a Small Country

The Impact of Trade Policies

Export Subsidy
 An export subsidy can also be specific or ad
valorem
 A specific subsidy is a payment per unit exported.
 An ad valorem subsidy is a payment as a proportion of the
value exported.
 An export subsidy raises the price of a good in the
exporting country, making its consumer surplus
decrease (making its consumers worse off) and
making its producer surplus increase (making its
producers better off).
The Impact of Trade Policies

Export Subsidy
The Impact of Trade Policies

Import Quota
 An import quota is a restriction on the
quantity of a good that may be imported.
 This restriction is usually enforced by issuing
licenses to domestic firms that import, or in
some cases to foreign governments of
exporting countries.
The Impact of Trade Policies

Voluntary Export Restraint

 A voluntary export restraint works like an
import quota, except that the quota is
imposed by the exporting country rather than
the importing country.
 However, these restraints are usually
requested by the importing country.
The Impact of Trade Policies

Local Content Requirement

 A local content requirement is a regulation
that requires a specified fraction of a final
good to be produced domestically.
 It may be specified in value terms, by
requiring that some minimum share of the
value of a good represent domestic valued
added, or in physical units.
The Impact of Trade Policies

Other Trade Policies

 Export credit subsidies
 A subsidized loan to exporters
 US Export-Import Bank subsidizes loans to US exporters.
 Government procurement
 Government agencies are obligated to purchase from
domestic suppliers, even when they charge higher prices
(or have inferior quality) compared to foreign suppliers.
 Bureaucratic regulations
 Safety, health, quality or customs regulations can act as
a form of protection and trade restriction.